Something that’s never ever occurred in the oil market is occurring today: Negative rates for oil contracts.
While lots of people might see this and believe the general cost of oil is negative, there’s subtlety. The brief answer is that no, not all oil is totally free.
The image in the market is not as bleak as this eye-popping headline would suggest.
Futures contracts are tied to a specific delivery date. Toward the end of a contract’s expiration date, the cost generally converges with the physical price of oil as the last purchasers of these contracts are entities like refineries or airlines that are going to take real physical shipment of the oil.
Futures contracts ultimately are agreements for physical shipment of the underlying commodity or security. While some individuals in the market hypothesize on the agreements, others are purchasing and offering due to the fact that they have use for the commodity itself. Near the contract’s expiration, traders simply begin buying the next month’s futures agreement. Those who stay in the position to the final day are generally buying the physical commodity, such as a refiner.
The agreement that fell more than 100%on Monday is for Might shipment, and it ends Tuesday. With the coronavirus pandemic causing unprecedented demand loss, and with tank quickly filling up, there is no need for this oil contract expiring Tuesday.
That’s why it turned negative, implying manufacturers would pay to get this oil off their hands because there is no one that requires that oil today with the country shutdown.
Futures agreements trade by the month. The contract for June shipment traded 16%lower at $2104 per barrel.
So after that agreement ends on Tuesday, oil will be back above $20
The U.S. Oil Fund, which tracks the price of various futures on oil, fell simply 10%.
Trading volume was also fairly thin in the May agreement. According to data from the CME Group, volume stood at approximately 126,400 By contrast volume for the June contract was nearly 800,000
John Kilduff of Again Capital associated the plunge in the May contract to the truth that “the physical oil market conditions are a disaster, with growing concerns about discovering available storage.”
Longer term, he said the picture looks brighter.
” The higher priced, longer-dated futures contracts are a sign of the market expecting some level of clearing in the cash market throughout the next a number of months,” he informed CNBC. “Given the fast decrease in the U.S. oil rig count and the anticipated lowering by OPEC members that is a reasonable assumption.”
That stated, he noted that as the subsequent contracts reach expiration, they could participate in their own “death march down towards the super-low cash costs.”
Sign Up For CNBC PRO for unique insights and analysis, and live organisation day shows from around the world.
